Venezuela Roils Multinationals

Venezuela's currency devaluation wreaked havoc on the balance sheets of multinational companies last year and remains a challenge for companies operating in the country this year.

ENLARGE

Venezuelan President Hugo Chávez, in Caracas Friday, has threatened the expropriation of car maker Toyota.
Reuters

It's the latest in a series of issues—ranging from price fixing to the nationalization of certain industries—that multinationals are contending with in the Latin American country as they chase growth markets outside the U.S. and Europe and set their sights on Latin America's burgeoning middle class.

Doing business overseas can bring with it challenges such as unstable currencies and political turmoil, but Venezuela has proven to have an inordinate number of pitfalls.

Venezuela's currency was devalued twice last year, sending the bolivar to 4.3 a dollar from 2.15 bolivars a dollar. The devaluations led to a $24 million reduction in pretax earnings for infant-formula maker Mead Johnson Nutrition Co.MJN-1.22% and a $33.4 million decline in sales for Revlon Inc.REV-1.43% last year. Mattel Inc.MAT-0.98% and Clorox Co.CLX-0.08% in earnings calls also bemoaned the bolivar's decline.

"Unfortunately, we are facing further headwinds from the bolivar as we enter 2011," Mead Johnson's finance chief, Peter Leemputte, said during the company's fourth-quarter earnings call.

To mitigate costs associated with the bolivar's devaluation, Tupperware Brands Corp.TUP0.36% is importing fewer products into Venezuela and is ramping up production in its Venezuelan plant, said Chief Financial Officer Michael Poteshman. That reduces the company's reliance on importing, which has become more expensive with the bolivar's devaluation. The company also is raising its prices to offset inflation, he says.

Venezuela in 2009 accounted for more than $50 million in sales for Tupperware, but it was below that threshold last year, primarily because of currency issues, Mr. Poteshman said. The company doesn't disclose sales figures by country.

Tupperware in 2009 had a $4.9 million foreign-exchange related charge in the third quarter and a $3.5 million expense in the fourth quarter. "It's unpredictable exactly what will happen with the exchange rate," said Mr. Poteshman about the currency's impact on revenue this year.

DiageoDEO-0.79% PLC has been pegging the prices of its premium spirits to dollar equivalents and introducing less-expensive brands into Venezuela as the bolivar devalues, Diageo executives said in an interview last month. For the company's first half, the weaker bolivar had a negative impact of £211 million ($343 million).

To offset currency issues and inflation, Revlon raised its prices in the region, the company said in its fourth-quarter earnings release.

The Venezuelan market has its share of other obstacles. About half the items in the country's consumer-price index are subject to price controls, said Patrick Esteruelas, a senior analyst with Moody's. That limits a company's ability to raise prices and can cut into margins.

Bausch & Lomb Inc. has made a push into Latin America over the last year. "We've made a very special emphasis to grow in Latin America," Chief Executive Brent Saunders said. But, "when you look at the dynamism of Latin America, it's hard to put Venezuela at the top of the priority list, given massive inflation, weakened intellectual-property rights, price controls and currency issues," he said.

Multinationals also risk expropriation by President Hugo Chávez. In October, glassmaker Owens-Illinois Inc.OI-0.65% was expropriated, and Mr. Chávez alluded to future expropriations. Owens-Illinois had been operating two plants in Venezuela for over 50 years, when it was expropriated without warning, said company spokeswoman Stephanie Johnston. The country accounted for 3% of sales globally.

Within two days of Mr. Chávez's announcement, government representatives reported to the plants to shadow Owens employees and learn their jobs, the company said. In December, the company wrote the plants off as discontinued operations, taking a $329 million charge related to the write-off as well as to the devalued bolivar, she aid.

Drilling rig supplier Helmerich & Payne Inc.HP-1.69% last year was expropriated from Venezuela after operating in the country for 50 years, a spokesman said. Mr. Chávez also threatened the expropriation of Japanese auto maker Toyota Motor Corp.

Despite the difficulties of doing business there, Venezuela remains an important Latin American region for multinationals, analysts said. The country relies heavily on imports and has shown healthy consumption trends, Moody's Mr. Esteruelas said.

Also, he said, some executives hope Mr. Chávez will be ousted during the country's next elections, opening the door to better working conditions for multinationals.

"Leading up to the expropriation we had a very favorable working relationship and we hope maybe some day to be back there again," said Ms. Johnston, of Owens-Illinois.

Bausch & Lomb has plans to remain in Venezuela despite the country's current issues. "It's an important market," Mr. Saunders said.

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